An Experimental Investigation of Reputation Effects of Disclosure in an Investment / Trust Game
Journal of Economic Behavior and Organization 94 (2013): 130-144.
33 Pages Posted: 19 Nov 2009 Last revised: 10 Aug 2020
Date Written: July 25, 2013
This paper examines experimentally the reputation building role of disclosure in an investment / trust game. It provides experimental evidence in support of sequential equilibrium behavior in a finitely repeated investment / trust game where information asymmetry raises the possibility of voluntary disclosure. I define two regimes, namely disclosure regime and no-disclosure regime and it is only in the disclosure regime that such disclosure of private information is a possibility. I compare investment levels across two regimes and find the startling result that investment is lower in disclosure regime. I find that this lower investment is attributable to the fact that the prior probability with which an investor in the disclosure regime believes that a manager is trustworthy is significantly lower than the prior probability with which an investor in the no-disclosure regime believes that a manager is trustworthy. I introduce a two-stage experimental design to homogenize prior beliefs about managers’ trustworthiness and find that after such homogenization, investment is higher in disclosure.
Keywords: Disclosure, Reputation, Investment, Trust.
JEL Classification: C73, C92, D82, M40.
Suggested Citation: Suggested Citation